The AS/AD framework

The AS/AD framework

Demand and supply curve have been used widely in economics to demonstrate behavior of consumers and producers in an economy. The aggregate supply aggregate demand has the same role for the general economy. The aggregate supply curve gives a summary of supplier’s behavior in an economy in terms of production decisions of the producers and the activities around the inputs market the while aggregate demand gives a summary of desired macroeconomic level of purchases and undertakings in the financial and asset market that affect consumption decisions. The aggregate supply curve has a positive slope; however it can be at times horizontal of vertical depending on conditions underlying the market. The long run aggregate supply curve is usually perfectly inelastic thus differing with the microeconomic supply curve that is usually relatively more elastic in the long run than in the short run. The vertical supply curve means output is always constant; this is because the level of demand only affects supply in the short run such that increase in nominal price of all goods and services have no effect on aggregate supply.

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